DOES THE DOMESTIC INVESTMENT BENEFIT FROM THE INFLOWS AND OUTFLOWS OF FDI? PANEL DATA EVIDENCE FROM THE ASEAN-8 CONTRIES

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1 Proceedngs of the Australan Academy of Busness and Socal Scences Conference 214 (n partnershp wth The Journal of Developng Areas) ISBN DOES THE DOMESTIC INVESTMENT BENEFIT FROM THE INFLOWS AND OUTFLOWS OF FDI? PANEL DATA EVIDENCE FROM THE ASEAN-8 CONTRIES ABSTRACT Bee Wah TAN Soo Khoon GOH Centre for Polcy Research and Internatonal Studes, Unverst Sans Malaysa, Malaysa. Ko Nyen WONG Busness School, Sunway Unversty, Malaysa. Over the past two decades, the Asan developng countres have seen a rapd growth n ther outwards FDI (UNCTAD, 25). Gven the role of outward FDI to domestc nvestment s mportant n determnng a country s development polces, ths paper ams to study the mpact of nward and outward FDI on domestc nvestment n ASEAN-8 countres for the perod usng panel data. Usng the Pooled Mean Group estmaton approach (Pesaran et al., 1999), ths paper fnds the gross domestc savng, nward and outward FDI have a postve long-run mpact on the gross the domestc nvestment even though ther long-run estmates are nelastc. Moreover, the emprcal study reveals that both nward and outward FDI are complementary to the gross domestc nvestment for the ASEAN-8 countres, whch provde meanngful polcy mplcatons for the regonal governments to acheve nclusve growth and sustanable development. JEL Classfcaton: F21 Keywords: Outward FDI, nward FDI, domestc nvestment, multnatonals, ASEAN Correspondng Author s Emal Address: bewahtan@gmal.com INTROUCTION In recent years, globalzaton has led to a rapd ncrease n the growth of foregn drect nvestment (FDI) globally (Zhang and Daly, 211). Snce the early 199s, the Asan developng countres have seen a rapd growth n ther outward FDI (UNCTAD, 25). Indeed, Asa outward FDI flows accountng for US$ 195 bllon of the total US$ 253 bllon n 27. Among others, the Assocaton for Southeast Asa Natons (ASEAN), whch s rapdly ntegratng wth the rest of the world, ts outward FDI has also been ncreasng sharply n recent years. ASEAN countres have recorded as the thrd largest source of outward FDI, amountng to US$ 33 bllon n 27 and rose to 82 per cent to US$ 6 bllon n 211 (UNCTAD, 28; UNCTAD 212). Fgure 1 demonstrates the outward FDI trends for ASEAN-8 countres, namely Brune Darussalam, Camboda, Indonesa, Lao, Malaysa, the Phlppnes, Sngapore and Thaland, from Among others, Sngapore s the leadng source of outward FDI n the ASEAN regon. The outflows from Sngapore acheved peak n 21, accountng for US$ 27 mllon. In addton, Malaysa and Thaland saw a strong growth n FDI outflows snce 199 s. FDI outflows n Indonesa and the Phlppnes saw stable growth where the dstrbuton of FDI outflows falls between US$ 1 bllon US$ 9.9 bllon (UNCTAD, 213). On the other hand, FDI outflows n Brune Darussalam, Camboda and Lao saw unstable grows, wth a lower dstrbuton that not exceeded US$.1 bllon (UNCTAD, 213). Nevertheless, all the ASEAN countres experenced a dp n FDI outflows durng the Asan Fnancal Crss n 1997/98. FIGURE 1. OFDI FOR THE ASEAN-8 COUNTRIES,

2 Proceedngs of the Australan Academy of Busness and Socal Scences Conference 214 (n partnershp wth The Journal of Developng Areas) ISBN BRUNEI CAMBODIA INDONESIA LAO MALAYSIA PHILIPPINES SINGAPORE THAILAND Source: UNCTAD, Dvson of Investment and Enterprse. Note: OFDI flows are expressed n US$ mllon. By and large, several theoretcal and emprcal papers such as Hejaz and Pauly (23), Desa et al. (25), Herzer and Schrooten (27) suggested that hgh outward FDI flows affect domestc output. Some of the emprcal studes such as Feldsten (1995), Anderson and Hanut (1998), Al-Sadq (213) defended the vews that outward FDI do not affect domestc nvestment. Understandng of the mpact of outward FDI flows to domestc nvestment s mportant n determnng a country s development polces. If outward FDI s found to complement domestc nvestment, ths would have polcy relevance pertanng ntegratng domestc frms n the producton networks and supply chans of the regonal multnatonals. Hence, ths would help stmulate the growth n foregn and domestc nvestment and mprove economc growth n the ASEAN countres. Otherwse, the substtuton effect from outward FDI flows to domestc nvestment may be detrmental to development. Ths paper proposes to address the ssue of the mpact of domestc savng, nward FDI, outward FDI on domestc nvestment for the eght ASEAN countres usng the theoretcal framework by Feldsten (1995). The framework s an extenson of the well-known approach whch Feldsten and Horoka (198) utlsed n ther study of the relatonshp between savng and nvestment among OECD countres durng the 196s and 197s. The major contrbuton of ths study s that t s the frst effort to emprcally analyse the short and long run mpact of outward FDI on domestc nvestment n ASEAN countres usng panel data analyss. The advantages of panel data are that t deals wth both tme seres and cross secton propertes of the data. Ths has the major advantage of mprovng the statstcal propertes of estmates when the number of observatons over tme s lmted, whch s typcally the case when we annul data were used for ASEAN countres. Moreover, ths study use Pooled Mean Group estmator (PMG) to explore the mpact of outward FDI on domestc nvestment among ASEAN-8 countres. Ths partcular estmator allows us to deal wth heterogenety problem by allowng the short run coeffcents and error varances to dffer across countres but assumng homogenety of the long run coeffcent by poolng countres over the long run. The fndngs of ths emprcal evdence would provde a useful gude for modellng and effectve growth polces for the ASEAN countres. The rest of ths paper s organsed as follows. Secton 2 provdes the emprcal revews and the theoretcal framework, data and methodology used n ths study are dscussed n Secton 3. The emprcal fndngs and concluson are presented n Secton 4 and 5, respectvely. EMPIRICAL LITERATURE In ths paper, we consder the possble mpact of nward and outward FDI to domestc nvestment to eght ASEAN countres. Earler emprcal results on the mpact of outward FDI to domestc nvestment are mxed and nconclusve. Some studes found that outward FDI substtutes the country s domestc nvestment, whle others fnd that outward FDI complements domestc nvestment, and some fnd no mpact.

3 Proceedngs of the Australan Academy of Busness and Socal Scences Conference 214 (n partnershp wth The Journal of Developng Areas) ISBN Steven and Lpsey (1992) clamed that outward FDI and domestc nvestment by US multnatonal are substtutes, suggestng outward FDI crowds out domestc nvestment. Usng data from 197s and 198s, Felsten (1995) analyses the effect of outbound FDI on the domestc captal stock n OCED countres. They found that each dollar of outbound FDI reduces domestc nvestment by approxmately one dollar. In addton, Anderson and Hanut (1998) suggest that domestc nvestment tends to declne n response to outflows, although t should be recalled that FDI actvtes are stll domnated by flows between the ndustres countres so that net outflows to emergng market countres are rather small. Km (2) added that outward FDI by Korean multnatonal frms had a detrmental effect on home country performance. On the other hand, Desa et al. (25) evaluated the evdence of the relatonshp between outbound FDI and levels of domestc captal formaton for OECED countres and also Amercan multnatonal frms. The result suggests that outward FDI from OECD countres reduces domestc nvestment. Conversely, the greater foregn nvestment by the US MNE s abroad s assocated wth hgher levels of domestc nvestment. More recently, Saoramo (28), usng data on the perod from , was concerned wth the relatonshp between outward FDI and domestc nvestment n Fnland. Based on the emprcal results, the strong growth of outward FDI s causng a low domestc nvestment actvty n Fnland. Grma et al. (21) amed to study the mpact of outbound FDI by frms from an emergng economy on ther domestc economy. Evdence suggests that for Indan MNCs, sgnfcant levels of outbound FDI have a negatve mpact on the growth n domestc nvestment. Usng the ARDL modelng approach, Goh and Wong (forthcomng) explored the mpact of outward FDI on domestc nvestment n Malaysa over the perod of 1999 to 21. The sgn of emprcal analyss reveals that the effect on domestc nvestment by FDI outflows s substtutonal. Al-Sadg (213) examned the effects of outward FDI on domestc nvestment n 121 developng and transton economes over the perod Usng the system- GMM estmator developed by Arellano and Bover (1995) and Blundell and Bond (1998), they suggest that FDI outflows negatvely mpact the rate of domestc nvestment. On the other hand, Hejaz and Pauly (23) clamed that nward FDI s postvely related to domestc nvestment. However, outward FDI n the US showed postve mpact on Canadan domestc nvestment, and, the lack of effect from FDI n the UK. Moreover, Barba Navaratt and Castellan (24) examned the effects of outward FDI on domestc output n Italy. They measured the performance of outward FDI and domestc output at home of a sample of Italan frms whch have nvested abroad. Usng propensty score matchng, the results show that outwardnvestng frms experenced hgher growth n domestc output. They provde valuable nsghts nto the domestc output effects of ndvdual frms nvestng abroad, but t does not ndcate the long-run effects of outward FDI on the economy as a whole. Consequently, Goedegebuure (26) examned the relatonshp between outward FDI and domestc nvestments for the Netherlands n the perod of It was found that the mpact of out FDI outflows on domestc R&D s postve. On the other hand, Herzer and Schrooten (27) examned the long-run mpact of aggregate outward FDI on total domestc output of 14 ndustralzed countres over the perod Usng panel contegraton technques, they found that outward FDI has postve long-run effects on domestc output. Furthermore, the long-run causalty s bdrectonal, suggestng that ncreases n domestc output n turn allow frms to nvest more abroad. Consequently, ncrease outward FDI s both a cause and a consequence of ncreased domestc output. Imbran et al. (211) nvestgated the causal effect of movng abroad on home performance for a large panel of Italan frms. Ther estmaton results showed that Italan outward FDI tends to strengthen the domestc economy actvtes of nvestng frms. Chen and Yang (213) studed the mpact of a frm s outward FDI on ts domestc R&D spendng. Usng panel data on Tawanese manufacturng frms from , the emprcal evdence reveals that a Tawanese frm s outward FDI s postvely related to ts domestc R&D spendng. MODEL SPECIFICATION, DATA AND ESTIMATION METHOD Model Specfcaton The present paper examnes the possble mpacts of GDS, IFDI and OFDI on domestc nvestment n the ASEAN-8 countres based on Feldsten s (1995) theoretcal model, whch s an extenson of Feldsten and Horoka s (198)

4 Proceedngs of the Australan Academy of Busness and Socal Scences Conference 214 (n partnershp wth The Journal of Developng Areas) ISBN Savng-Investment model. The former model has been adopted for emprcal studes such as Sauramo (23), Desa et al. (25), Goh and Wong (212), whch s wrtten as follows: GDI GDS OFDI IFDI a b c d u GDP GDP GDP GDP (1) where GDI s gross domestc nvestment, GDS s gross domestc savng, GDP s gross domestc product, OFDI s outward FDI, IFDI s nward FDI, and u s a stochastc dsturbance. Snce takng logarthmc transformaton can lnearze the model and make elastcty calculatons easer as the estmated coeffcents are approxmate to the percentage changes n varables (Gujarat and Porter, 28), the model can be rewrtten as LDI LGDS LIFDI LOFDI (2) t 1 t 2 t 3 t t where L denotes the natural logarthm and s the resduals. t Data The sample perod and the sample choce of the ASEAN countres are entrely based on avalablty of data for each varable of nterest. Owng to the sparse data on IFDI, the pooled sample countres are restrcted to eght nstead of the ten ASEAN countres, whch spans annually from 1986 to 211. The eght ASEAN countres are Brune Darussalam, Camboda, Indonesa, Lao, Malaysa, the Phlppnes, Sngapore and Thaland. The proxy varable for GDI s gross fxed captal formaton (GFCF). Its data source for GFCF and GNS are obtaned from the World Bank, World Development Indcators and Global Development database. Whle both IFDI and OFDI data can be retreved from Unted Naton Conference on Trade and Development (UNCTAD), Dvson on Investment and Enterprse database. All the varables are seasonally adjusted and are expressed n constant US dollar (2=1) before beng transformed nto logarthmc terms. Table 1 presents the basc descrptve statstcs for each varable of nterest. Estmaton Method Panel Unt Root Tests The panel unt root test wll be used to examne the degree of ntegraton between GDI, GDS, IFDI and OFDI. We test for unt roots usng the panel-based methods proposed by Levn et al. (22) hereafter referred to as LLC; and Im et al. (23), hereafter referred to as IPS. TABLE 1. DESCRIPTIVE STATISTICS FOR LGDI, LGDS, LIFDI AND LOFDI LGDI LGDS LIFDI LOFDI Mean Medan Maxmum Mnmum Std. Dev Skewness Kurtoss Jarque-Bera Probablty Sum Sum Sq. Dev Observatons As ponted out by Maddala and Wu (1999), the Levn et al. (22) type tests have good power when autoregressve roots are dentcal over the cross sectons. On the other hand, poolng ndvdual test statstcs may be more approprate when there s heterogenety n the dynamc parameters. The LLC test s the most wdely used panel unt root test and can be specfed as follows:

5 Proceedngs of the Australan Academy of Busness and Socal Scences Conference 214 (n partnershp wth The Journal of Developng Areas) ISBN t t 1 t j t j 1 P y y P y (3) where s the frst dfference operator, y t s the serred of observatons for country, t 1, 2,..., T, tme perods. The test has the null hypothess of H : for all aganst the alternatve of H, whch presumes 1 that all seres are statonary. LLC assumes that s homogenous across regons and the test s based on the t-bar statstcs of the estmator and thus provdes hgher power than ndvdual observaton unt root estmaton. Moreover, the IPS test s an extenson of the LLC test and s based on the mean of the ndvdual unt root statstcs. These tests are less restrctve and more powerful than the tests developed by Levn and Ln (1993), Levn et al. (22) and Bretung (2), whch do not allow for heterogenety n the autoregressve coeffcent. The tests proposed by IPS permt solvng Leven and Ln s seral correlaton problem by assumng heterogenety between unts n a dynamc panel framework. The basc equaton for the panel unt root tests for IPS s as follows: y y y ; 1, 2,..., N; t 1, 2,..., T, (4), t, t 1 j, t j, t j 1 p where y t, stands for each varable under consderaton n our model, s the ndvdual fxed effect and s selected to make the resduals uncorrelated over tme. The null hypothess s that for all versus the alternatve hypothess, whch s that for some 1,..., N and for N 1,..., N. 1 1 The IPS statstc s based on averagng ndvdual Augmented Dckey-Fuller (ADF) statstcs and can be wrtten as follow: t 1 N tt N 1 (5) where t t s the ADF t-statstc for country based on the country-specfc ADF regresson, as n (2). The t statstc has been shown to be normally dstrbuted under H, and the crtcal values for gven values of N and T are provded n Im et al. (23). Mean Group (MG) and Pooled Mean Group (PMG) Estmators After establshng the order of ntegraton of the varables, the estmates wll be obtaned usng two recently developed methods for the statstcal analyss of dynamc panel data: the Mean Group (MG) and the Pooled Mean Group (PMG) estmatons. The MG estmator s the least restrctve procedure and t allow for heterogenety of all the parameter. The MG estmator ntroduced by Pesaran and Smth (1995) derves the long-run parameters for the panel from an average of the long-run parameters from autoregressve dstrbuted lag (ARDL) models for ndvdual countres. On the other hand, the PMG estmator proposed by Pesaran et al. (1999) nvolves both poolng and averagng as t was an ntermedate estmator that allows the short-run parameters to dffer between groups whle mposng equalty of the long-term coeffcents between countres. Mean Group (MG) The MG estmators estmates separate regressons for each country and computng averages of the country-specfc coeffcents whch wll provde consstent estmates of the long-run coeffcents. For example, f assumes that an autoregressve dstrbuted lag (ARDL) n the followng: a ( L) y b ( L) x d z e t t t t (6) For country, where 1,..., N, then the long-run parameters for country s b (1) d (1) And the MG estmator for the whole panel wll be gven by 1 N N 1 It can be shown that MG estmaton wth suffcently hgh lag orders yelds super-consstent estmators of the long-run parameters even when the regressors are I (1) (see Pesaran et al., 1999). The assumptons are qute

6 Proceedngs of the Australan Academy of Busness and Socal Scences Conference 214 (n partnershp wth The Journal of Developng Areas) ISBN strong as t requres that the group-specfc parameters are dstrbuted ndependently of the regressors, and the regressors are strctly exogenous. It does not take account of the fact that certan parameters may be the same across the group. Pooled Mean Group (PMG) For the PMG method of estmaton ntroduced by Pesaran et al. (1999) occupes an ntermedate poston between the MG method. The PMG estmaton confrms that only the long-run coeffcents are constraned to be the same across countres, whle the short-run coeffcents are allowed to vary. In other word, the PMG estmaton allows for country-specfc short-term adjustments and convergence speeds, whle mposng cross-country homogenety restrctons only on the long-run coeffcent. Hence, the PMG estmaton has advantages to determne the long-run and short-run dynamc relatonshps. Settng ths out more precsely, the unrestrcted specfcaton for the ARDL system of equatons for t 1, 2,..., T tme perods and 1, 2,..., N countres for the dependent varable y s m n ' t j, t j j, t j t j 1 j y y x where x s the ( k 1) vector of explanatory varables for group and j can be re-parametersed as a VECM system: m 1 n 1 ' ' ( ) t, t 1, t 1 j, t j j, t j t j 1 j (8) y y x y x (7) represents the fxed effects. Ths model ' where s are the long-run parameters and s are the error correcton parameters. The pooled group restrcton s that the elements of are common across countres, so that m 1 n 1 ' ' ( ) t, t 1, t 1 j, t j j, t j t j 1 j (9) y y x y x The PMG estmator allows for heterogeneous short-run coeffcents yet constrans long-run parameters to be the same across unt,.e.. Estmaton of ths model s by maxmum lkelhood. Agan, t s proved that under some regularty assumptons, the parameter estmates of ths model are consstent and asymptotcally requre selectng the approprate lag length for the ndvdual country equatons. Ths selecton was made usng the Akake Informaton Crteron (AIC). The procedure consders all possble lag orders on all varables (up to a maxmum lag order) and selects the specfcaton wth the best AIC value. Fnally, the crucal queston s whether the assumpton of long-run homogenety s justfed, gven the threat of neffcency and nconsstency noted by Pesaran and Smth (1995). We employ Hausman (1978) test (hereafter h test) on the dfference between MG and PMG estmates of long-run coeffcents to test for long-run heterogenety. If the parameters are n fact homogenous, the PMG estmated are more effcent than MG. Under the null hypothess, the dfference n the estmated coeffcents between MG and PMG are not sgnfcantly dfferent and PMG s more effcent. EMPIRICAL RESULTS Panel Unt Root Tests The panel unt root tests are performed before runnng the MG and PMG analyss of the panel data. The results of the LLC and IPS unt root tests are presented n Table 2. The unt root test results suggest that LGDI, LIFDI and LOFDI are non-statonary n level wth and wthout trend. However, both tests ndcate that LGDS s non-statonary (.e. I(1)) n level wth trend, but s statonary (I()) n level wthout trend. Thus, the unt root tests for LGDS s nconclusve. Despte the mxed unt root test results, as ponted out by Km et al. (21) and Iwata et al. (211), the MG and PMG estmaton of an ARDL regresson provdes consstent estmators rrespectve of whether the varables are I()

7 Proceedngs of the Australan Academy of Busness and Socal Scences Conference 214 (n partnershp wth The Journal of Developng Areas) ISBN or I(1) f there exsts a unque vector defnng the long-run relatonshp among varables wth sutable lag order chosen. Snce all the varables are statonary n frst dfference at least at 5 per cent level of sgnfcance (see Table 2), we can conclude that no varables are I(2) or hgher. Hence, the MG and PMG approaches can be employed for estmaton. TABLE 2. RESULTS OF UNIT ROOT TESTS Levn, Ln and Chu (LLC) Im, Pesaran and Shn (IPS) Wthout Trend Level Frst Dfference Level Frst Dfference LGDI *** *** LGDS ** *** *** LIFDI *** *** LOFDI *** *** Wth Trend LGDI *** *** LGDS *** *** LIFDI *** *** LOFDI *** *** Notes: The astersks *** and ** denote the sgnfcance level at 1 and 5 per cent, respectvely. L denotes natural logarthm. The optmal lag length s selected usng the AIC whle the bandwdth s selected usng Neway-West Barlett kernel. The panel regresson model ncludes an ndvdual ntercept, and ndvdual ntercept and trend. The MG and PMG Estmaton Results Pror to estmatng usng the MG and PMG estmaton methods, the lag length of the estmatng the models can be determned by the AIC and Schwarz Bayesan Crteron (SBC). Gven the lmted sample sze, a maxmum lag length of two s mposed on the models. Both lag length selecton crtera suggest that the ARDL (1,1,1,1) s the most adequate for all countres. Table 3 shows the estmates by MG and PMG as well as the Hausman test results. Snce the jont Hausman test cannot reject the null hypothess of the absence of the long-run heterogenety (.e. there s no sgnfcant dfference between MG and PMG estmates of long-run coeffcents), the estmated coeffcents n natural logarthm by the PMG appear consstent and effcent n comparson to the MG estmates and they can used for elastcty analyss n the short and long run. Gven that the error-correcton estmates are sgnfcantly negatve for MG and PMG estmators (refer to Table 3), the fndngs confrm there exsts a long run relatonshp among LGDI and ts determnants (LGDS, IFDI and OFDI). Specfcally, the PMG estmates show that LGDS, LIFDI and LOFDI are sgnfcantly postve related to LGDI. The speed of adjustment to ts long-term relaton s about 2 years and 4 months. The estmated effect of GDS on GDI mples that a 1% pont ncrease n GDS would generate.35% ncrease n GDI. The estmaton results also show that a 1% pont ncrease n IFDI and OFDI would result n a.1% and.6% ncrease n GDI respectvely. The evdence of the complementary relatonshp between OFDI and GDI corroborates the emprcal studes by Hejaz and Pauly (23), Barba Navaratt and Castellan (24), Goedegebuure (26), Herzer and Schrooten (27), Imbran et al. (211), Chen and Yang (213). TABLE 3. RESULTS OF MG AND PMG ESTIMATION (DEPENDENT VARIABLE: LGDI ) Pooled Mean Group (PMG) Mean Group (MG) Jont Hausman Test Long-run coeffcents Coeffcent S.E Coeffcent S.E Ch-square LGDS.3511* LIFDI.133** (.6955) LOFDI.623* Short-run coeffcents LGDS LIFDI LOFDI

8 Proceedngs of the Australan Academy of Busness and Socal Scences Conference 214 (n partnershp wth The Journal of Developng Areas) ISBN Error-correcton term -.232*** ***.1535 Notes: The astersks ***, ** and * denote the sgnfcance level at 1, 5 and 1 per cent, respectvely; S.E. denotes as standard errors. As dscussed n Secton 2, the short-run coeffcents usng the PMG approach are not restrcted to be the same across countres. As a result, we do not have a sngle pooled estmate for each coeffcent. It s nterestng to note that the estmated short-run coeffcents by the PMG estmator are not sgnfcant, mplyng there s no short-run relaton between GDI and ts key explanatory varables such as GDS, IFDI and OFDI. Havng establshed that GDI s contegrated wth GDS, nflow and outflow FDI n ASEAN, we proceed to the country specfc speed of adjustment and estmated coeffcent of the short-run components over the ASEAN-8 countres. The speed of adjustment parameter s expected to be negatve and sgnfcant, ndcatng adjustment the long-run equlbrum n response to the shocks. The results as presented n Table 4 show those countres ndvdual estmates of the error correcton coeffcent are all negatve, except for Malaysa. However, the sgnfcant adjustment to equlbrum s present only n the case of Brune Darussalam, Camboda, Indonesa, Lao and the Phlppnes, wth a range of -.6 to The parameter s relatvely hgh for Brune Darussalam, Camboda, Indonesa, and the Phlppnes wth the half-lfe adjustment range from 2 to 4 and the half years. The results dffer for Lao, where sgnfcant adjustment taken around 6 months to devate towards ts equlbrum, mplyng a rather speedy correcton to the equlbrum for Lao. Brune Darussalam TABLE4. RESULTS OF PMG ESTIMATION FOR COUNTRY SPECIFIC (ASEAN-8) Short-run coeffcent Dagnostc Checkng LGDS LIFDI LOFDI ECT CH SC CH FF CH NO CH HE *** (.249) Camboda.417 (.969) Indonesa.1872* (.17) Lao (.1219) Malaysa -139*** (.458) Phlppnes (.1524) Sngapore.436 (.7568) Thaland.3494 (.58).1724** (.673) * (.691).146 (.173) (.495).476 (.49) (.225) -.73*** (.226) -.69 (.556).392** (.2) -.785*** (.28) -.9 (.79) (.241).144 (.354) -.4 (.127).129* (.68).435 (.362) ** (.974) * (.2486) *** (.883) *** (.229).652 (.134) *** (.957) -.74 (.52) (.884).2246 (.8938) (.2179) (.272) (.336) (.2743) (.182) (.462) (.1198).6836 (.554).3387 (.7464) 74 (.327).1841 (.8525) 2.75 (.176).4398 (.666).6527 (.5222).773 (.5642) (.5714).4928 (.7816) (.4968).484 (.7859).2648 (.876) (.5661).3133 (.855) (.5642) (.7449) (.953) (.7196) (.662) (.3882) (.873) (.5313) (.926) Note: All varables are expressed n natural logarthms. CH-SC s the Breusch-Godfrey s of resdual seral correlaton, asymptotcally dstrbuted as 2 wth one degree of freedom under the null hypothess of no seral correlaton. CH-FF s the Ramsey RESET test of functonal form, asymptotcally dstrbuted as 2 wth one degree of freedom under the null hypothess of 2 no seral correlaton. CH-NO s the Jarque-Bera test of normalty regresson resduals, asymptotcally dstrbuted as wth one degree freedom under the null hypothess of no seral correlaton. CH-HE s the Lagrange multpler (LM) test of 2 homoscedastcy, asymptotcally dstrbuted as wth one degree freedom under the null hypothess of no seral correlaton. Standard error n parenthess ( ); ***, ** and * ndcate sgnfcant at 1%, 5% and 1%, respectvely. On the other hand, Table 4 ndcates that both IFDI and OFDI have negatve mpact on GDI n Camboda. The estmated coeffcents for both IFDI and OFDI are negatve and statstcally sgnfcant. The estmated coeffcents suggest that a 1 per cent ncrease n IFDI and OFDI results n a.12 per cent and.8 per cent decrease n GDI, respectvely. The fndngs ndcate that outward and nward FDI are substtutng domestc nvestment n Camboda. The coeffcent for GDS, despte t s postvely related to GDI, but s not statstcally sgnfcant.

9 US$ mllon Proceedngs of the Australan Academy of Busness and Socal Scences Conference 214 (n partnershp wth The Journal of Developng Areas) ISBN FIGURE 2. GDI AND GDS IN BRUNEI LGDI LGDS Turnng to the case of Indonesa, the GDS coeffcent s postve and sgnfcant at 1 per cent, mplyng 1 percentage pont ncrease n savng ncreases GDI by.1 per cent. However, both the IFDI and OFDI are not statstcally sgnfcant. For the Phlppnes, despte the error correcton term s negatve and sgnfcant, suggestng a contegraton among the varables, but there s no sgnfcant short run relatonshp between GDI, GDS, IFDI and OFDI. FIGURE 3. The CUSUM test for ASEAN-8 countres CUSUM 5% Sgnfcance CUSUM 5% Sgnfcance CUSUM 5% Sgnfcance CUSUM 5% Sgnfcance Brune Darussalam Camboda Indonesa Lao CUSUM 5% Sgnfcance CUSUM 5% Sgnfcance CUSUM 5% Sgnfcance CUSUM 5% Sgnfcance Malaysa The Phlppnes Sngapore Thaland The robustness of the model has been confrmed by several dagnostc tests. The Breusch-Godfrey test reveals no sgnfcant seral correlaton n the dsturbance of the error term. The Jarque-Bera (JB) statstcs suggest that the dsturbances of the regressors are normally dstrbuted. The Ramsey RESET test statstcs ndcate no serous omsson of varables, mplyng the model s correctly specfed. Lastly, the heterocedastcy test suggests that the dsturbance term n the equaton s homoscedastc. Pesaran et al. (1999) asserted that the stablty of the estmated coeffcent of the error correcton model should be graphcally nvestgated. In vew of ths, we apply the Cumulatve Sum (CUSUM) and the Cumulatve Sum of Square (CUSUMSQ) tests, whch were developed by Brown et al. (1975). The CUSUM test s based on the cumulatve sum of recursve resduals based on the frst set of n observatons. Ths test s updated recursvely and s plotted aganst the break pont. The estmated coeffcent proves to be stable f the plot of the CUSUM statstcs stays wthn 5 per cent sgnfcant levels. The country-specfc graphcal presentaton of CUSUM test s presented n Fgure 3. Besdes, smlar procedure s used to carry out the CUSUMSQ test that s based on the squared recursve resduals. The country-specfc graphcal presentatons of the CUSUMSQ test are provded can be found n Fgure 4. FIGURE 4. The CUSUMSQ test for ASEAN-8 countres

10 Proceedngs of the Australan Academy of Busness and Socal Scences Conference 214 (n partnershp wth The Journal of Developng Areas) ISBN CUSUM of Squares 5% Sgnfcance CUSUM of Squares 5% Sgnfcance CUSUM of Squares 5% Sgnfcance CUSUM of Squares 5% Sgnfcance Brune Darussalam Camboda Indonesa Lao CUSUM of Squares 5% Sgnfcance CUSUM of Squares 5% Sgnfcance CUSUM of Squares 5% Sgnfcance CUSUM of Squares 5% Sgnfcance Malaysa The Phlppnes Sngapore Thaland CONCLUSION AND POLICY IMPLICATIONS Usng the recently ntroduced and more sutable PMG estmator (Pesaran et al., 1999), ths study examnes the mpact of domestc savng, nward FDI and outward FDI on domestc nvestment for ASEAN-countres from 1986 to 211. The emprcal evdence llustrates that there s a long run relatonshp between GDI, GDS, IFDI and OFDI n ASEAN-8 countres. The analyss of error correcton model shows that GDS, IFDI and OFDI are the key determnants of GDI. Moreover, the PMG estmaton advocates that GDS, IFDI and OFDI are sgnfcantly postve towards GDI n the long-run. Ths ndcates that the ASEAN-8 outward FDI and ts domestc nvestment are complementary nstead of substtutve. In contrast, there s short-run relatonshp between GDI and GDS, IFDI and OFDI. Fnally, the country specfc estmaton results ndcate mxed results for ndvdual ASEAN member state as some varables are movng together or n opposte drecton durng the estmaton perod. The dsparty of such emprcal results may be due to the tests are conducted usng data sets that belongng to heterogeneous groups of countres. Broadly speakng, the fndngs n ths paper can provde useful polcy mplcatons for the ASEAN governments to acheve nclusve growth and sustanable development. Accordng to Plummer (29), the ASEAN as a regon s dverse n terms of the comprehensveness of lberalzaton. The evdence of low postve long-run elastcty of GDI wth respect to IFDI as well as OFDI mples that the ASEAN governments should pursue more lberal FDI polces to encourage FDI nflows as well as outflows. The lberal polces on IFDI are nstrumental n ncreasng gross captal formaton and facltatng technology transfer that can potentally stmulate domestc frms nvestment. Apart from allowng greater foregn partcpaton n the regonal economy, the regonal governments should encourage more jont ventures between domestc frms wth foregn frms n order to promote domestc nvestment. Moreover, the less developed economes n ASEAN should allocate a hgher proporton of the government budget to ncrease spendng on nfrastructure to attract FDI nflows. Lberal polces towards OFDI could encourage more outward cross-border drect nvestment by potental ASEAN frms n the long run, whch has the advantage of nternatonalzng ther busness actvtes abroad so that they can be part of the global supply chans. And these OFDI actvtes are also expected to have a postve mpact GDI through ntra- and nter-frm trade. The evdence of the weak complementary relatonshp between OFDI and GDI also suggests a need for polcy makers to further deepen the ntegraton relatonshp wth the am of boostng regonal nvestment actvtes. For nstance, the ASEAN governments should be more actve n ther efforts to promote outward nvestment by ntroducng double taxaton agreement and provde outward nvestment ncentve such as nvestment guarantees. REFERENCES Arellano, M. and Bover, O., Another look at the nstrumnental varable estmaton of error-components model, Journal of Econometrc, 1995, Vol. 68, pp

11 Proceedngs of the Australan Academy of Busness and Socal Scences Conference 214 (n partnershp wth The Journal of Developng Areas) ISBN Al-Sadq, A., Outward FDI and domestc nvestment: The case of developng countres, Internatonal Monetary Fund (IMF) Workng Paper, 213, WP/13/52. Anderson, P.S. and Hanut, P., Foregn drect nvestment and employment n the ndustral countres, BIS Workng Papers, 1998, No. 61. Barba Naravett, G. and Castellan, D., Does nvestng abroad affectng performance at home?, Comparng Italan multnatonal and natonal enterprses. CEPR Dscusson Paper, 24. Blundell, R. and Bond, S., Intal condtons and moment restrctons n dynamc panel data models, Journal of Econometrcs, 1998, Vol. 87, No. 1, pp Bretung, J., The local power of some unt root tests for panel data, n Nonstatonary Panels, Panel Contegraton, and Dynamc Panels, Advances n Econometrcs, Edted by Baltag, B.H., 2, Publshed by JAY Press, Amsterdam, pp Brown, R.L., Durbn, J. and Evans J.M., Technques for testng the constancy of regresson relatonshps over tme, Journal of the Royal Statstcal Socety, Seres B (Methodologcal), 1975, Vol. 37, pp. 2, pp Chen, K.M. and Yang, S.F., Impact of outward foregn drect nvestment on domestc R&D actvty: Evdence from Tawan s multnatonal enterprses n low-wage countres, Asan Economc Journal, 213, Vol. 27, No. 1, pp Desa, M.A., Foley, C.F. and Hnes, J.R., Foregn drect nvestment and the domestc captal stock, Amercan Economc Revew, 25, Vol. 95, No. 2, pp Feldsten, M., The effect of outbound foregn drect nvestment on the domestc captal stock, n The effects of Taxaton and Multnaton Corporaton, Edted by Feldsten, M, Hnes, J.R. and Hubbard, R.G., 1995, Publshed by Unversty of Chcago Press, Chcago, pp Feldsten, M. and Horoka, C., Domestc savngs and nternatonal captal flows, Economc Journal, 198, Vol. 9, pp Grma, S., Patnak, I. and Shah, A., The mpact of outbound FDI on domestc nvestment, Research Paper, NIPFP-DEA Research Program, 21. Goedegebuure, R., The effects of outward foregn drect nvestment on domestc nvestment, Investment Management and Fnancal Innovatons, 26, Vol. 3, No. 1, pp Goh, S.K. and Wong, K.N., Could nward FDI offset the substtuton effect of outward FDI: evdence from Malaysa. Praque Economc Papers, (forthcomng). Gujarat, D. and Porter, D., Basc Econometrcs, 4 th Edton, 28, Publshed by McGrae-Hll Irwns, Boston, MA. Hausman, J.A., Specfcaton tests n economcs, Econometrca, 1978, Vol. 46, No. 6, pp Hejaz, W. and Pauly, P., Motvatons for FDI and domestc captal formaton, Journal of Internatonal Busness Studes, 23, Vol. 34, No., pp Herzer, D. and Schrooten, M., Outward FDI and domestc nvestment. DIW Dscusson Paper 679, 27, Publshed by Deutsches Insttut für Wrtschaftforschung, Burln. Im, K.S., Pesaran, M.H. and Shn, Y., Testng for unt roots n heterogeneous panels, Journal of Econometrcs, 23, Vol. 115, No. 1, pp Imbran, C., Pttglo, R. and Reganat, F., Outward foregn drect nvestment and domestc performance: the Italan manufacturng and servces sectors, Atlantc Economc Journal, 211, Vol. 39, No. 4, pp Iwata, H., Okada, K. and Samreth, S., A note on the envronmental Kuznets curve for CO 2 : A pooled mean group approach, Appled Energy, 211, Vol. 88, No. 5, pp Km, D.Y, Ln, S.C. and Suen, Y.B., Dynamc effects of trade openness on fnancal development, Economc Modellng, 21, Vol. 27, No. 1, pp Km, S.J., Effects of outward foregn drect nvestment on home country performance: Evdence from Korea, n The Role of Foregn Drect Investment n East Asan Economc Development, Edted by Ito, T. and Krueger, A.O., NBER-EASE, 2, Vol. 9, Publshed by Unversty of Chcago Press, pp Levn, A. and Ln, C.F., Unt root test n panel data: New results, Unversty of Calforna at San Dego, Dscusson Paper, 1993, No Levn, A., Ln, C.F. and Chu, C.S.J., Unt root tests n panel data: Asymptotc and fnte-sample propertes, Journal of Econometrcs, 22, Vol. 18, No. 1, pp Maddala, G.S. and Wu, S.W., A comparatve study of unt root tests wth panel data and a new smple test, Oxford Bulletn of Economcs and Statstc, 1999, Vol. 61, No. 1, pp Pesaran, H. and Smth, R.P., Estmatng long-run relatonshps from dynamc heterogeneous panels Journal of Econometrcs, 1995, Vol. 68, No. 1, pp

12 Proceedngs of the Australan Academy of Busness and Socal Scences Conference 214 (n partnershp wth The Journal of Developng Areas) ISBN Pesaran, H., Shn, Y.C. and Smth, R.P., Pooled mean group estmaton f dynamc heterogeneous panels, Journal of the Amercan Statstcal Assocaton, 1999, Vol. 94, No. 446, pp Plummer, M.G., ASEAN Economc Integraton: Trade, Foregn Drect Investment, and Fnance, Publshed by World Scentfc Publshng Co. Pte. Ltd, Sngapore. Sauramo, P., Does outward foregn drect nvestment reduce domestc nvestment? Macro-evdence from Fnland. Labour Insttute for Economc Research, Dscusson Papers, 28, No.239 (Helsnk). Stevens, G.V.G. and Lpsey, R.E., Interactons between domestc and foregn nvestment, Journal of Internatonal Money and Fnance, 1992, Vol. 11, No. 1, pp UNCTAD, World Investment Report 25, Transnatonal Corporatons and the Internatonalzaton of R&D, 25, Publshed by Unted Naton, New York and Geneva. UNCTAD, World Investment Report 28: Transnatonal Corporatons and the Infrastructure Challenge, 28, Publshed by Unted Naton, New York and Geneva. UNCTAD, World Investment Report 212: Towards a New Generaton of Investment Polces, 212, Publshed by Unted Naton, New York and Geneva. UNCTAD, World Investment Report 212: Global Value Chans: Investment and Trade for Development, 213, Publshed by Unted Naton, New York and Geneva. Zhang, X.X. and Daly, K., The determnants of Chna s outward foregn drect nvestment Emergng Markets Revew, 211, Vol. 12, No. 4, pp